OCR down 0.5%

The Reserve Bank Governor has dropped the official cash rate from 3.0% to 2.5%. Normally OCR movements are 25 basis points only, so a drop of 50 is deemed large.

There are two fiscal costs to the earthquake. One cost is the estimated $15b drop in GDP over the next five years – and the OCR drop is in recognition of this.

The other cost is the actual cost of rebuilding which may be up to $20b. As the construction gets underway, then it will put inflationary pressure on the economy and I suspect we will see interest rates rise rapidly – but not until probably 2012.

Bernard Hickey has a good piece on why the Reserve Bank dropped the OCR, despite inflationary pressures looming.

I tend to think a 0.25% drop would have been adequate, as it sends the signal, but then means a less drastic escalation in future.

However as I have around a $500,000 mortgage which is mainly floating, I at least benefit from the Reserve Bank dropping 0.5% – saves me a couple of thousand dollars.